Record-breaking investments in emerging markets

Investors are flocking to emerging market stocks and bonds at a near-record pace as falling inflation and the reopening of China's huge economy help reverse last year's decline.

According to high-frequency data tracking 21 countries from the Institute of International Finance, emerging market equities and debt markets have attracted $1.1 billion a day in nice new money this week. The pace of cross-border flows now only rivals the surge following the end of the Corona lockdowns in late 2020 and early 2021, but exceeds previous highs of the past two decades.

The strong inflows underscore a big shift in sentiment this year after emerging markets by and large performed poorly in 2022. The fall in global inflation has led many market participants to bet that major developed central banks, including the US Federal Reserve, will soon stop raising interest rates - a major source of pain for emerging markets.

Jahangir Aziz, an analyst at JPMorgan, said there is "still plenty of air in the tank" for a further recovery in inflows now that the key economic uncertainties that have weighed on emerging markets are "lifting".

The threat of recession has receded. Data released on Thursday showed the US economy grew more than expected in the final quarter of 2022, posting an annual growth rate of 2.9% while unemployment remains low.

China's decision to abandon its zero-covid policy has also had a big impact. The country's inflows account for US$800 million of the US$1.1 billion daily flows for all emerging markets, according to IIF data.